FILED

United States Court of Appeals

Tenth Circuit

UNITED STATES COURT OF APPEALS December 20, 2011

TENTH CIRCUIT

Elisabeth A. Shumaker
Clerk of Court

In re:
SCOTT R. BAKAY, also known as Scott
Ronald Bakay,
Debtor,
-----------------------GEORGE DIAMOND; GEORGIA
DIAMOND,
Plaintiffs-Appellants,
v.

No. 11-1373
(BAP No. CO-11-003
Bankr. No. 09-33358
Adv. No. 10-01155 - Chapter 7)
(D. Colo.)

SCOTT R. BAKAY,
Defendant-Appellee,
and
DAVID. E. LEWIS, Trustee,
Appellee.

ORDER AND JUDGMENT*

This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. It may be cited, however, for its
persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.

Before BRISCOE, Chief Judge, MURPHY and MATHESON, Circuit Judges.

After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination of this
appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is, therefore,
submitted without oral argument.
Plaintiffs-appellants George and Georgia Diamond filed an adversary proceeding
against Chapter 7 debtor Scott Bakay alleging that Bakay fraudulently induced them to
loan him money. The bankruptcy court entered summary judgment in favor of the
Diamonds and declared the loan nondischargeable, but denied the Diamonds
postjudgment motion for prejudgment interest. The Diamonds appealed this latter
decision, and the Bankruptcy Appellate Panel of the Tenth Circuit (BAP) affirmed the
decision of the bankruptcy court. The Diamonds now appeal to this court. Exercising
jurisdiction pursuant to 28 U.S.C. 158(d)(1), we affirm the bankruptcy courts decision.
I
The Diamonds and Bakay were neighbors in Denver, Colorado. Bakay, who
operated a mortgage company and helped the Diamonds refinance their home, convinced
the Diamonds that he was also the president of Imperial World Developers, Inc. (IWD), a
Colorado corporation that was purportedly developing a condominium tower project in
Cancun, Mexico. In October 2004, Bakay represented to the Diamonds that if they would

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loan IWD $100,000, he would personally guarantee the obligation and that he and IWD
would repay the Diamonds $200,000 within six months (i.e., by mid-April 2005) from the
presales of condominium units. The Diamonds agreed to the proposed arrangement and
entered into a written agreement prepared by Bakay.
As it turns out, Bakays representations to the Diamonds regarding IWD and the
Cancun condominium development were false. The money the Diamonds purportedly
loaned to IWD was actually used by Bakay for his mortgage company. And the
Diamonds were never paid the $200,000 promised to them by Bakay. Indeed, as of late
2009, the Diamonds had not recovered any of the money they had loaned to Bakay and
IWD.
In November 2009, Bakay filed a Chapter 7 bankruptcy petition. The Diamonds in
turn filed an adversary proceeding against Bakay seeking to have the $100,000 that they
loaned Bakay declared a nondischargeable debt. The bankruptcy court ultimately granted
the Diamonds unopposed motion for summary judgment and declared the $100,000 loan
nondischargeable. The bankruptcy court also ordered Bakay to pay the Diamonds interest
on the debt from the date of the judgment.
The Diamonds filed a motion to amend the judgment, seeking prejudgment interest
on their claim at the Colorado statutory rate of eight percent. The bankruptcy court
denied the Diamonds motion, concluding that the Colorado statutory interest rate was
inapplicable because the Diamonds had sued on a claim of nondischargeable fraud, rather
than for breach of the underlying loan agreement. The Diamonds then filed a second
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motion to amend the judgment, this time seeking prejudgment interest at the federal rate
from the time they loaned the money in October 2004. The bankruptcy court again
denied the motion, concluding that [e]quity preclude[d] an award of prejudgment
interest because the Diamonds had waited more than four years before taking legal
action against Bakay. In other words, the bankruptcy court concluded that the Diamonds
could not unduly delay the prosecution of [their] case and, at the same time, be awarded
prejudgment interest during that period. Aplt. App. at 106. The bankruptcy court also
noted that the Diamonds could not equitably request prejudgment interest on a loan with
a criminally usurious interest rate of 200% which [wa]s well above the maximum legal
rate of 45% in Colorado where the loan was made. Id.
The Diamonds appealed from this latter order. The BAP affirmed the bankruptcy
courts decision. The Diamonds now appeal to this court.
II
Although this appeal is from a decision by the BAP, we review only the
Bankruptcy Courts decision. In re C.W. Mining Co., 641 F.3d 1235, 1240 (10th Cir.
2011) (internal quotation marks omitted). We review a bankruptcy courts award or
denial of prejudgment interest for abuse of discretion. In re Inv. Bankers, Inc., 4 F.3d
1556, 1566 (10th Cir. 1993). An abuse of discretion occurs when the bankruptcy courts
decision is arbitrary, capricious or whimsical, or results in a manifestly unreasonable
judgment. In re Lang, 414 F.3d 1191, 1199 (10th Cir. 2005). Any underlying factual
findings made by the bankruptcy court [are reviewed] for clear error. In re C.W. Mining
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Co., 641 F.3d at 1240.

Under federal law, prejudgment interest may generally be awarded if 1) the award
of prejudgment interest would serve to compensate the injured party, and 2) the award of
prejudgment interest is otherwise equitable. In re Inv. Bankers, 4 F.3d at 1566. Thus
under federal law prejudgment interest is ordinarily awarded, absent some justification for
withholding it. U.S. Indus., Inc. v. Touche Ross & Co., 854 F.2d 1223, 1256 (10th Cir.
1988), overruled on other grounds as recognized by Anixter v. Home-Stake Prod. Co., 77
F.3d 1215, 1231 (10th Cir. 1996). That said, however, prejudgment interest is not
recoverable as a matter of right. U.S. Indus., 854 F.3d at 1256. Instead, awards of
prejudgment interest are governed by fundamental considerations of fairness. Id.
(internal quotation marks omitted).
In this case, the bankruptcy court concluded that an award of prejudgment interest
in favor of the Diamonds was not fair or equitable because, in part, the Diamonds had
unduly delayed in filing suit against Bakay. Although the Diamonds assert that their
delay in filing suit was attributable to Bakays continu[ance of] the lies and deceit,
Aplt. Br. at 13, including his repeated promises to repay them, as well as Bakays
leaving the country, id. at 10, we are unable to conclude that the bankruptcy courts
conclusion on this point was arbitrary, capricious, or whimsical. As the BAP concluded
in affirming the bankruptcy courts decision, [t]he fact that [Bakay] made a number of
misrepresentations regarding his intent and ability to pay th[e] debt some three years
after the Diamonds loaned the money does not necessarily justify the Diamonds
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extensive delay in pursuing their legal rights. Aplt. App. at 115.

The bankruptcy court also concluded that an award of prejudgment interest in the
Diamonds favor was inequitable because the interest rate included in the underlying loan
agreement was, in the bankruptcy courts words, criminally usurious. Id. at 106.
Although, like the BAP, we are uncomfortable with this characterization, we fully agree
with both the BAP and the bankruptcy court that the agreed rate of return on the
Diamonds money under the terms of the underlying loan agreement was outrageous,
in that it would have been . . . nearly 4.5 times the highest allowable rate of interest in
Colorado. Id. at 116. We thus conclude that the bankruptcy court did not abuse its
discretion in taking into account this factor in denying the Diamonds request for
prejudgment interest.
The order of the bankruptcy court denying the Diamonds postjudgment motion
for prejudgment interest is AFFIRMED.

Entered for the Court

Mary Beck Briscoe

Chief Judge

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